Since this is a crisis of solvency as well as liquidity, orderly debt restructuring must begin. This means across the board reduction on the mortgage debt for the roughly half of America’s households that are underwater ….

This Has Always Been a Solvency Crisis, Not a Liquidity Crisis

Roubini is right.

It has always been a solvency crisis – not a liquidity crisis – since 2008.

The government has used all of the wrong tools to address the economy, which has made the crisis worse. See this, this and this.

Instead of Making Bondholders Get a “Haircut” By Writing Down Bad Debt, Government Has Been Scalping the Average American

The pattern of serious financial crises is the market meltdown hits first, then the real economy plunge takes place later. Our officialdom had been patting itself on the back that “better” policy responses had stopped the sort of damage that the US suffered in the Great Depression and Japan experienced in its post bubble hangover. But the GDP revisions of last week included some stunning reductions to 2008 figures which called the comparatively cheery story we’ve been told into question. And the powers that be have refused to take the important step of writing bad debt down. Zombification was treated as the solution to our woes, when the result of past financial crises shows that taking the losses early which does result in a worse initial GDP hit, leads to much better outcomes. And here, the casualty has been not only growth but to a fair degree our political system, as the corporocrats have used the crisis to solidify their position.

Indeed, many – such as John Hussman – have explained that average Americans are getting scalped so that bondholders can be saved from taking a haircut.